Free Cash Flow Per Share
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What is Free Cash Flow per Share?
Free Cash Flow per Share calculates the Free Cash Flow (FCF) generated by the company on a per-share basis, reflecting the cash available to each share after capital expenditures.
How do you interpret Free Cash Flow per Share?
Free Cash Flow per Share indicates the cash available after capital expenditures, providing insight into the company's ability to generate cash that can be returned to shareholders or reinvested.
How to Calculate Free Cash Flow per Share?
FCFPS is calculated by dividing the company's free cash flow by the number of outstanding shares of common stock. Free cash flow is the cash generated from operations after capital expenditures.
FCFPS=Free Cash Flow/Number of Outstanding Shares
where
- Free Cash Flow (FCF) is calculated as cash flow from operations minus capital expenditures (FCInv).
- Number of Outstanding Shares is the total number of shares currently held by all shareholders.
Why is Free Cash Flow per Share important?
Free Cash Flow per Share is important because it provides insights into a company’s financial flexibility and its ability to return value to shareholders. It shows how much cash a company generates relative to its share base, which can be used for dividends, stock buybacks, or reinvestment in the business.
How does Free Cash Flow per Share benefit investors?
Investors use FCFPS to assess a company's financial health and its ability to generate excess cash. Companies with high and growing FCFPS are typically seen as better investments, as they have more flexibility to distribute cash to shareholders or reinvest in the business for future growth.
Using Free Cash Flow per Share to Evaluate Stock Performance
Free Cash Flow per Share is used to evaluate a company's ability to generate cash on a per-share basis. Investors often compare FCFPS trends with the company’s stock price to assess whether the stock is fairly valued. A consistently growing FCFPS is generally a positive sign and could indicate a good investment opportunity.
FAQ about Free Cash Flow per Share
What is a Good Free Cash Flow per Share?
A "good" FCFPS depends on the industry and the company's specific financial situation. Generally, higher and increasing FCFPS values are considered positive because they reflect stronger cash generation and potential for higher shareholder returns.
What Is the Difference Between Metric 1 and Metric 2?
Free Cash Flow per Share (FCFPS) focuses on the cash available to shareholders after necessary capital expenditures. Earnings per Share (EPS) measures a company’s profitability, but it may not accurately reflect the cash generation, as it includes non-cash items like depreciation and amortization.
FCFPS provides a clearer picture of cash availability, while EPS reflects profitability.
Is it bad to have a negative Free Cash Flow per Share?
Yes, a negative FCFPS suggests that the company is not generating enough cash from its operations to cover its capital expenditures, which may indicate financial struggles or heavy investment periods. However, in growth companies, temporary negative FCFPS could be acceptable if they are investing for future growth.
What Causes Free Cash Flow per Share to Increase?
FCFPS can increase due to:
Higher operating cash flow
Reduced capital expenditures
Share buybacks, which reduce the number of shares outstanding
Cost efficiencies that improve cash generation
What are the Limitations of Free Cash Flow per Share?
Limitations of FCFPS include:
It can be volatile due to fluctuating capital expenditures.
It doesn’t consider non-cash earnings like depreciation or potential future cash flows.
Companies can manipulate FCF by delaying capital expenditures.
When should I not use Free Cash Flow per Share?
FCFPS should not be used in isolation when evaluating a company. It’s less useful for companies with heavy capital expenditures or industries where capital investment cycles fluctuate significantly. It should also be avoided when comparing companies across different sectors with varying cash flow needs.
How does Free Cash Flow per Share compare across industries?
FCFPS can vary significantly across industries. For example, capital-intensive industries such as utilities or telecoms might have lower FCFPS due to high capital expenditures. On the other hand, technology or service companies with lower capital needs may show higher FCFPS values. Therefore, it's crucial to compare FCFPS within the same industry.
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